HP

After a short and not terribly informative piece on Bloomberg saying that Salesforce had engaged with bankers to potentially evaluate takeover offers, the usual activities ensued. The company’s stock went for a small ride and pundits and prognosticators all began speculating about whom a logical suitor could be and even what the company would be worth on the block. This was not the first time.

I was one of the speculators placing a metaphorical bet on IBM as the suitor followed by Oracle, HP, and Microsoft in no order. They could all use the shine that acquiring this gem would provide. But let me be clear—I don’t believe Salesforce would be acquired in its current state.

The reason is simple—even if a buyer paid a premium on the company’s $50 billion market capitalization it would not be enough because Salesforce’s greatest asset is its future and you can’t put an accurate price on that. So far in its 15 plus year history the company has innovated and helped create markets in cloud computing, social media, CRM, modern platforms, wearable devices, web and mobile computing, and more. Salesforce might go by the ticker symbol CRM but its business is front office business innovation.

All of this is exactly why Salesforce is such an attractive target and precisely why no one will buy them. Large companies, which are the only ones that can afford to be in the bidding, are not hotbeds of innovation. They hang back waiting for markets to prove themselves before swooping in to offer products and services for new niches. Cloud computing is a great example. There’s a famous YouTube video of Larry Ellison at the Churchill Club ridiculing cloud computing as a fad and so much hot air. This was before Larry got religion (and products). Less flamboyant stories can be told of IBM, HP, Microsoft, and SAP—they all waited to enter the market watching Salesforce to ensure it was safe.

Now, of course, they all talk about cloud computing as if they invented it or at least as if they perfected it. Owning Salesforce would give one of their stories great credibility and then you could see a multiplier effect going out to the other innovative areas the company is involved in. But it could also signal the end of a good thing.

I don’t see how you can bring Salesforce into one of those shops and expect it to thrive; the cultures are too different. Salesforce is laid back and takes prudent risks entering new markets as they are forming so as to acquire a first mover advantage. The others? Not so much.

Aside from Apple, I don’t see other companies innovating the way Salesforce does to invent the future. That’s why Salesforce (and Apple) have such bright futures and why buying either company would be detrimental to the tech sector and the economy in general. It would slow or even curtail innovation.

Some might say that if Salesforce ceased to be the innovation engine that it is, that some other emerging companies would have the chance to take its place, that the free market would do its thing and all would be well. I agree with that but hasten to add that it has taken Salesforce 15 years to get to this point and other companies might be able to evolve quicker to fit into one or more of Salesforce’s niches, but it would take time and there’s no guarantee that those other companies would follow the same trajectory.

To make an analogy, if Thomas Edison got kicked in the head by a mule before he invented the incandescent lamp and the modern power grid, we’d likely still have them today along with sound recording and movies and many other things. But it’s hard to see that these inventions would have been as early and if that’s true, what would the last century have been like?

This is all speculation but so is trying to figure out who might be able to afford to buy the company. I’d be surprised if enough shareholders would be prepared to sell and keep in mind that insiders still own a big block. They’re also rich already so it’s hard to see the benefit of selling now rather than letting things evolve as Salesforce’s other endeavors begin to show profits.

Today Bloomberg was atwitter with the rumor that Salesforce is in talks with bankers about possible tender offers from some big companies in the industry. Aside from wondering if there’s any validity to the speculation does it or would it make any sense?

For starters, Salesforce has a market cap north of $50 billion and buyouts command a premium so we’re looking for someone with deep pockets. Regardless of pockets, Oracle, Microsoft, and SAP have their own cloud projects and while any of them could afford the deal, would they contemplate throwing away their other investments? Ordinarily I’d dismiss a sunk-cost argument as illogical but we’re talking about a lot of money.

IBM could do the deal too and they need a future. Right now they’re buying back stock to keep their share price up and because they don’t have much else to spend their war chest on. Salesforce would be good for soaking up some of their cash. Ditto the others on the list.

Salesforce has a commanding lead in business software because while others were too timid to go after things like cloud, social, mobile, and IoT, Salesforce jumped in and made markets. Their future is full of all the new markets they’re going after and it ain’t small.

From that perspective, I wonder if the Justice Department would want to weigh in on an acquisition. Despite there being other vendors in the space, Salesforce occupies a unique place as the innovator. Can we really expect one of the possible suitors to be as aggressive with Salesforce and new markets as Benioff and company? Me thinks not.

That said though nothing is forever and Salesforce has had a great run. Murphy’s Law would suggest that someone could come in and mess it up.

Just as we were trying to digest the HP announcement that it would cleave amoeba-like into two distinct entities, Symantec has announced the same intent. This also follows eBay’s announcement that it would spin off PayPal, so says the New York Times. And what do eBay and HP have in common? Meg Whitman. What’s going on here? Healthy capitalism I say.

Look, lots of companies acquire other businesses as they seek faster growth and greater synergies in their markets. Often times the acquisitions don’t work out exactly as the acquirers had hoped. The worst-case scenario is when the acquired company fizzles either because it could not be assimilated or because it was a dud to begin with and of course, there are numerous permutations on the theme. But often enough to be interesting the merged entity continues along two separate paths with both companies continuing to be successful but in their own ways.

So every now an again it makes sense to take inventory and ask if all of the acquisitions or self-generated businesses provide the kind of overall synergy needed. If not, it’s time for spinoffs and we’re beginning to see several as the foregoing paras indicate.

Yesterday I wrote that Oracle might be another candidate for splitting up and old friend Josh Greenbaum heartily agrees so I’ve got that going on. If you read that article from the Times, you might get the idea that spinoffs might be the next big thing in Silicon Valley and beyond. If so, and if the idea gains enough steam, this trend might depress the regular IPO market. What would you rather buy, a start up doing an IPO or a division of a seasoned company with a track record and a culture accustomed to hitting its marks? There are good reasons for both.

I don’t think we’ve ever seen anything like this in the tech sector. Last time there was an opportunity was the end of the mini-computer era and instead of spinning off units, those companies imploded. There was wreckage everywhere and truth be told, the networked PC and server world envisioned to replace it was a little late in coming — recall the year of the network that only took a decade to reach fruition. That resulted in a nuclear winter where no one wanted to buy much because it was all either obsolete or not up to snuff.

That’s not happening this time in part because the legacy products are so embedded in our businesses today and because much of it is paid for already so what’s the cost of keeping it?

Spinning off non-core businesses to concentrate on the knitting is smart for both parties and should result in significant new innovation and entrepreneurship as newly liberated companies take off their blinkers and design and build products for new opportunities in the whole market, even for companies that were once competitors.

Companies as big as Oracle and even Microsoft might benefit from a spinoff strategy and I suspect there are new business models to be tried too. Although the flavor right now is to spinoff an entity to be completely free-standing, I can see situations where more interlocking arrangements can be developed. The Japanese might call these keiretsus though we might think of them as monopolies or trusts as in the Sherman Anti-trust Act.

In the long history of capitalism, this seems to be a phase that recurs when conditions are right — it happened with Oil and Steel and automobiles though it was sometimes called vertical integration. Whatever it turns into I think this week might have seen an inflection point.

I have to say it was and is an interesting idea because Larry is 70 and just stepped up to Executive Chairman, leaving the CEO duties to Mark Hurd and Safra Catz. This idea has been surfaced before too. About a year ago it came up and died a gentle death when few outlets picked up on it.

Also, it might be human nature to think like this — to look for a single strong leader to take us to the promised land (whatever that is) — but real life experience seems to run in the opposite direction. Rather than seeking the uber boss, societies, at least the successful ones, instead split the organization whenever it gets too big.

There is a lot of historical precedence for the split over the big boss approach and it has changed over time in a predictable way. To understand the predictability you need a little math in the form of the Dunbar Number.

The Dunbar Number is actually a very elastic thing and could more easily be described as a concept or even a law of sociology (I dunno, I ain’t a sociologist). It says that the average human can keep track of about 150 or maybe 220 people and after that not so good results. This seems like a big number to me but I am an introvert, not shy, just not into maintaining lots of relationships and I am quite comfortable with ideas.

If you look at human organizations, pre-social media, the Dunbar concept applies remarkably well. Of course, CEOs are always trying to limit their direct reports but go up or down a level and you see interesting things. For example, in the Middle Ages, monasteries were working communities of about the Dunbar number. When one got too big, the abbot split off a unit and told one of the members to go elsewhere, build a new monastery, and keep up the tradition. That’s actually how the monastic tradition spread and if you read “How the Irish Saved Civilization” by Thomas Cahill you’ll see the story played out.

Now, social media has turned the Dunbar Number on its head but even with that assist there is a practical limit to the number of friends you can have even online. Perhaps that number varies by individual but the point is that it’s finite and probably not as big as the number of followers many of us have.

There are other examples too such as the military company, the atomic unit of military effectiveness. Corps, divisions, regiments, and battalions are all different aggregations of companies. But what’s this have to do with Oracle? Well it’s indirect. A story in today’s New York Times announces that HP’s CEO, Meg Whitman, wants to split the company into a PC unit and an Enterprise one.

My analysis is that HP is too big to be effective at pursuing a strategy even with all of the computers and communication infrastructure the company has so it’s a natural to seek a way to group similar products and skills into separate companies. Refer to the monastery idea and consider Dunbar and ask yourself if this makes sense.

So, all this is to say that my response to Mark Tamis and his idea is to think small-er. Rather than trying to find the uber boss, if that person even exists, it might be time for Oracle to consider cleaving itself into logical units that have more autonomy than they currently do but that still tree up to a single entity. This might be a worthwhile trend for a lot of first generation Silicon Valley companies.

Oracle is currently made up of a Byzantine assortment of in-house developed technologies and bought companies. It is also a player in almost every part of the tech sector from hardware to apps. The company’s current tag line, “hardware and software engineered to work together” is well chosen to give an impression that is no longer needed. The goods might be engineered together but that’s not the same as being designed and built for the purpose from whole cloth. In fact, Oracle reflects the marketplace it tries to serve which is sophisticated, complex, and aggressively heterogeneous, whatever the marketing lingo says.

Certainly Meg Whitman is rolling the dice with this split but from my perspective it is a logical and appropriate thing to do, and one that has historically delivered results. Would Oracle ever consider splitting into a hardware enterprise, a legacy software company, and a third dedicated to more modern web/social/mobile technologies? Never say never out in the valley, except maybe to the idea of Benioff taking over Oracle.

Approves Oracle’s acquisition of Sun

The bureaucrats in the EU finally stopped looking through the wrong end of the telescope long enough to approve Oracle’s purchase of Sun Microsystems. The deal had been held up for months while the EU tried to decide if the acquisition, which included MySQL, a database product bought by Sun in 2008, would have a deleterious effect on innovation in the database market. They finally decided it would not.

As a practical matter, innovation in the database market peaked many years (decades?) ago when the market began to consolidate around Oracle and the seven (or three, whatever) dwarfs. The market took care of trimming the number of databases and market demand did the rest, forcing Oracle and IBM (DB2) to develop more and better product features over time.

I am not so much of a free market enthusiast to think that everyone is a rational player (we humans are no such thing) and that the market always produces the best result — Voltaire’s Dr. Pangloss put a permanent hole in that hull. But I do believe, in this case at least, that Oracle and Sun have a clear understanding of the economic forces that are driving them into the first (?) hardware-software consolidation in the industry.

True enough, IBM is and has been a formidable supplier of gear, software and services. But absent any initiative to break up Big Blue, I can see no justification for holding up the Oracle-Sun merger. So now the merger proceeds and the bigger question will be how Hewlett-Packard responds.

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Beagle Research Group, LLC is a CRM analyst firm founded in 2004. We perform market research for vendors and advise end users in CRM selection, deployment and use. We also publish a steady stream of analysis on many of the industry’s most popular topics as well as emerging trends. For example, one of our core pursuits is researching emerging companies to understand current innovation trends. This research informs the advice we give our clients and readers.